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'TIS THE SEASON FOR MY ANNUAL LIST OF ECONOMICS-related books worth giving -- or better yet, getting -- as gifts. Works on the economic crisis are of special interest this year. Unfortunately, my inner Grinch won't let me recommend any from the raft of those recently published -- because all deal with economic crises superficially. But I can recommend seven books -- two titles I've cited previously that are indispensable for understanding 2008's dismal economy -- plus five others, including a highly topical critique of democracy from an economic perspective, and even a novel written by an economist.

I once called Gene Callahan's Economics for Real People (2002) the "best antidote I know to the numbing effects of the standard textbooks on economics." It's also an antidote to the widespread myth that the 2008 recession resulted from an excess dose of laissez-faire. This book provides the best introduction that I know to Austrian business-cycle theory (what Callahan dubs "ABCT"), originally developed by Austrian economists Ludwig von Mises and F.A. Hayek.

As Callahan notes ("Times are Hard: On the Causes of the Business Cycle," pages 203-229), true laissez-faire would let the market determine the interest rates at which money is borrowed, while arranging a reasonably harmonious fit between households' savings decisions and banks' and businesses' investment decisions. Around the time Callahan wrote, in 2002, the Fed already had cut the short-term interest rate to a level that no free market could ever permit -- below the rate of price inflation. In the process, the central bank fueled an unsustainable boom in housing.

Callahan's treatment of ABCT is especially valuable for its effective parrying of the usual objections to the theory. The main one rests on the argument that as risk-takers become aware of the tendency of boom-creating policies to lead to bust, the boom won't develop because the risks won't be taken. Among other cogent responses, Callahan writes about certain kinds of risk-takers who sound very much like players in the subprime-mortgage market. "Even if they could tell that they are witnessing an artificial boom," he observes, "it might make sense for them to 'take a flier' anyway. ...If they ride the boom, they will have a couple of years of the high life. And who knows, their business might just make it through!" (Pages 220-221; italics in original.)

Economics for Real People -- it can be downloaded at www.mises.org -- is also a great introduction to other key Austrian insights. My only complaint is that the author doesn't make it sufficiently clear why business cycles occurred even in the 18th and 19th centuries, long before the creation of the Federal Reserve. As economist George Reisman explains in his magnum opus, Capitalism (1998), government-induced expansion of money and credit goes back centuries.

Over the centuries, Reisman observes, on page 515: "The government...acted in the belief that the mere expansion of bank credit...could create real capital goods and thus generate prosperity. ...The government was urged on and applauded by businessmen seeking lower rates of interest -- seeking what they call 'easy money.' What actually happened...was not prosperity, but the trade cycle."

The radical solution to the business cycle will surely blow the average reader's mind, and is hardly popular even among professional economists. Reisman calls for a system in which "all paper currency and checking deposits would be 100% backed by gold and silver" (page 514). He also explains how this system could perpetuate itself through a "policy of free banking...the total absence of all government intervention in banking" (italics in original).

Yes, I know, conventional economic history says that the central bank was created precisely because unregulated free banking leads to instability. But that kind of banking was never permitted anyway.

The key point to grasp is how truly free banking would work. As Reisman observes on page 515, artificial credit expansion would still be both legal and possible, but "for all practical purposes would not take place." These and related points are thoroughly explored in two chapters of Capitalism -- "Money and Spending" and "Gold versus Inflation" -- which taken together are almost as long as the average full-length book. In fact, I once called Capitalism the War and Peace of economic treatises, a lengthy work that "amazes you for the way it settles once and for all just about every question anyone ever posed about economics." I still think so, even if it is a stocking-buster.

Reisman, an emeritus professor at Pepperdine University, also does ongoing commentary at www.georgereisman.com/blog/. Two of his recent essays on the current meltdown are must-reads: "Our Financial House of Cards," (March 22) and "The Myth that Laissez-Faire is Responsible for Our Financial Crisis" (Oct. 21).

Also try Reisman's bitterly hilarious excoriation ("Larry Summers: Heavyweight Centrist or Lightweight Leftist?" Nov. 30) of the scheme to massively redistribute income that recently was put forward by economist Larry Summers, President-Elect Obama's choice to head the National Economic Council.

Caplan's explanation is mainly that the mass of voters are economic illiterates. He does grant that special interest groups can wield anti-democratic power that leads to bad decisions. But even this cannot happen without tacit approval of the voters. For example, businesses enjoy tariffs that protect them from foreign competition, which harms the domestic economy. But tariffs wouldn't get very far if the public didn't already suffer from an "antiforeign bias" that views tariffs as relatively benign.

In a chapter wittily and appropriately called "Rational Irrationality," Caplan explains why people tend to behave irrationally as voters, but far more rationally as consumers. Consumers feel the direct material consequences of making bad decisions with their dollars. But their chances of affecting the outcome of an election or referendum with their votes is effectively nil. So they can enjoy the psychological benefits of voting their biases, while ignoring consequences that would, in any case, require a rational grasp of economics to fully appreciate.

"Democracy lets the individual enjoy the psychological benefits of irrational beliefs at no cost to himself," Caplan declares on page 206. "This of course does not deny the value of psychological benefits. But the trade-off is not socially optimal; democracy overemphasizes citizens' psychological payoffs at the expense of their material standard of living." Caplan therefore proposes more laissez-faire and less democracy to determine economic outcomes.

Barron's Gene Epstein talks about the best financial books to put on your winter reading list this year and for gifts that keep on giving.

But his argument doesn't go far enough. He might have talked a bit more about individual rights, especially when taking issue with thinkers he justifiably brands "democratic fundamentalists." From the standpoint of individual rights, it's better to have 51% of the people dictate to the other 49% than to have one dictator dictating to us all.

But far better, wherever possible, to take decisions out of the political arena and permit that 49% minority to exercise their own right to live their lives as they see fit. That's where markets come in. It is, after all, a capitalist market that permits a minority of us to read and enjoy Caplan's outstanding book, without encroaching on anyone else's right to ignore it.

CAPLAN IS KEENLY INTERESTED in educating voters to be more rational about economics. Toward that end, the other four titles on my list could make a huge difference.

The first is Columbia University business professor Amar Bhid&eacute;'s The Venturesome Economy (2008), subtitled, How Innovation Sustains Prosperity in a More Connected World.

With a felicitous writing style, Bhid&eacute; addresses the antiforeign bias that Caplan describes and explains why innovation can sustain prosperity in the U.S., regardless of whether it emanates from within our borders or from Europe, Asia or anywhere else. Read the chapter on "Alarmist Arguments" (pages 257-271), in which he politely, but devastatingly, refutes the "techno-nationalists" -- many of them distinguished economists -- who'd have us believe American prosperity depends on maintaining a lead "on all fronts" in technical research.

Or try the chapter (pages 341-355) on the positive outlook for jobs from global innovation. (Full disclosure: This chapter draws favorably on research I published last year in Barron's.)

I greatly enjoyed The Invisible Heart (2002), George Mason economics professor Russell Roberts' novel on economic issues, and I like his latest work of fiction, The Price of Everything (2008), almost as much. It's about a young Cuban-American who comes of age under the tutelage of his female economics professor. I won't spoil the surprise ending, except to say that it's futuristic and upbeat.

Over the years, I have seen many references to the work of Fr&eacute;d&eacute;ric Bastiat, a French economist who lived and wrote during the first half of the 19th century. (Caplan describes him in The Myth of the Rational Voter as "the original one-handed economist" -- a reference to the type of economic seer that Harry Truman vainly sought.)

This year, I finally read the two volumes of The Bastiat Collection (2007). The only depressing part about these funny and satirical essays that assault economic myths is that they all seem so current.

Nothing much seems to have changed in the more than century-and-a-half since they were published. Just read Bastiat's "Petition of the Manufacturers of Candles...and...Everything Connected with Lighting," (volume 1, pages 227-232), in which the French parliament is exhorted to protect the lighting industry from "the intolerable competition of a foreign rival" -- the sun.

Finally, over the years, I have recommended more books by the greatly gifted Thomas Sowell than by any other economist. I'm happy to note, then, that a revised and enlarged edition of his Applied Economics has been published. It covers key issues, ranging from medical care to immigration. Appropriately subtitled Thinking Beyond Stage One, it's a must-read for anyone interested in economics.